Does Auction Design Facilitate Collusion?

Abstract

This paper examines how auction design can unintentionally facilitate bidder collusion in land market. Departing from the dominant view that attributes low land concession revenues to corruption, we highlight how features of auction structure enable bidderside collusion, suppressing sale prices. Using a dataset of land auctions from 15 Chinese cities (2006-2016), we find that two-stage (listing) auctions are significantly more susceptible to collusion than one-stage formats. Empirical evidence shows that sales concluding at the (secret) reserve price occur disproportionately in two-stage auctions, even after controlling for land and market characteristics. We argue that the transparency and sequencing of two-stage auctions, while designed to enhance fairness, inadvertently reduce monitoring costs and facilitate tacit bidder coordination. Our findings underscore the need to jointly consider auction format and reserve price policy in designing land sales to enhance market efficiency and mitigate collusion risks.

Keywords: Collusion, Auction, Land Finance, Reserve Price